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Limits,Alternatives,

and Choices

Chapter 1

McGraw-Hill/Irwin Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

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Chapter Objectives

Economics defined

Role of economic theory

Microeconomics vs.macroeconomics

Resource scarcity and theeconomizing problem

Production possibilities model

1-2

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Economics Defined

Economic wants exceedproductive capacity

Social science concerned withmaking optimal choices under

conditions of scarcity

1-3

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The Economic Perspective

Thinking like an economist

Key features:

Scarcity and choicePurposeful behavior

Marginal analysis

1-4

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Scarcity and Choice

Resources are scarce

Choices must be made

There is no free lunch Opportunity cost

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Purposeful Behavior

Rational self-interest

Individuals and utility

Firms and profit Desired outcomes

1-6

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Marginal Analysis

Marginal benefit

Marginal cost

Marginal means extra Comparison of marginal benefit

and marginal cost

1-7

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Economic Models

The scientific method

Cause and effect

Economic principles Simplification of reality

Other-things-equal assumption Graphical expression1-8

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Macro vs. Micro

MacroeconomicsAggregate

MicroeconomicsIndividual Units

Positive Economics

Normative Economics

1-9

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Individuals Economizing Problem

Limited income

Unlimited wants

A budget line Tradeoffs & opportunity costs

Make best choice possible Change in income

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A Budget Line

6

543

210

0

246

81012

DVDs$20

Books$10

12

10

8

6

4

2

02 4 6 8 10 12 14

$120 Budget

Income = $120

Pdvd

= $20

= 6

Income = $120

Pb= $10

= 12

Attainable

Unattainable

Quantity of Paperback Books

QuantityofDVDs

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Societys Economizing Problem

Scarce resourcesLand

LaborCapital

Entrepreneurial Ability

Factors of production

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Production Possibilities Model

Illustrate production choices

Assumptions:

Full employmentFixed resources

Fixed technology

Two goods

1-13

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Type of Product

Pizzas(in hundred thousands)

Industrial Robots(in thousands)

Production Alternatives

A B C D E

10 9 7 4 0

0 1 2 3 4

Plot Points to Create Graph

Production Possibilities Table

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Production Possibilities Curve

Pizzas

IndustrialRobots

Attainable

0 1 2 3 4 5 6 7 8 9

1413

12

11

10

9

8

7

6

5

4

32

1

Unattainable

A

B

C

D

E

Economic

Growth

Now Attainable

A

B

C

D

E

1-15

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Production Possibilities Curve

Pizzas

IndustrialRobots

Attainable

0 1 2 3 4 5 6 7 8 9

1413

12

11

10

9

8

7

6

5

4

32

1

Unattainable

A

B

C

D

E

Law of Increasing

Opportunity Cost

A

B

C

D

E

Shape ofthe Curve

1-16

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Production Possibilities Curve

Pizzas

IndustrialRobots

Under orUnemployment

0 1 2 3 4 5 6 7 8 9

1413

12

11

10

9

8

7

6

5

4

32

1

Unattainable

A

B

C

D

E

U

1-17

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The Future Economy

Consequences of unemployment

Economic growth

More resourcesBetter quality resources

Technological advances

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Future Possibilities

Goods for the Present

GoodsfortheFuture

GoodsfortheFuture

Goods for the Present

P

F

CurrentCurve

CurrentCurve

FutureCurve

FutureCurve

Presentville Futureville

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International Trade

Production point

Consumption point

Specialization Preview

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Optimal Allocation of Resources

15

10

5

0 1 2 3

a

b

c

d

e

MB = MC

MC

MB

Quantity of Pizza

Margi

nalBenefit&M

arginalCost

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LAST W d

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LAST Word:Pitfalls to Sound Economic Reasoning

Biases

Loaded terminology

Fallacy of composition Post hoc fallacy

Correlation but not causation

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Key Terms

economics

economic perspective

opportunity cost

utility

marginal analysis

scientific method economic principle

other-things-equalassumption

macroeconomics

aggregate

microeconomics

positive economics

normative economics

economizing problem

budget line

economic resources

land

labor

capital

investment

entrepreneurial ability

factors of production

consumer goods

capital goods

production possibilities curve

law of increasing opportunitycosts

economic growth 1-23

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The Market

System and theCircular Flow

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